Joint and Several Liability Meaning
Joint and Several Liability refers to conditions in a contract which is legally enforceable under which two or more person are jointly as well as individually liable to make good to the other party same thing as enforced in the contract between them. Contracts entered into between parties predetermine their liability towards each other in different situations.
In other words, in the case of any breach of conditions of the contract, the grieved party to the contract can sue the other party (comprising of two or more persons) either individually or also jointly for discharging the obligations of the Contract.
Joint and several liability results in the claimant suing for discharging of liability arising out of the contract from the other party (two or more persons) individually or jointly. Let’s explain this with the help of a hypothetical example.
ABC LLP firm comprising of three partners Mr. A, Mr. B, and Mr. C agreed with Mr. Black to handle exclusive event management for him. The Agreement entered into between ABC firm and Mr. Black clearly states that in the event of any damages arising during the conduct of the said agreement ABC LLP firm and its partners will be jointly and several liable to discharge the damages.
While executing the event management for one of the events of Mr. Black, a large fire took place resulting in damages to the backstage artists as well as to Mr. Black resulting in total claims of $100000. Mr. Black filed a claim against ABC LLP and its partners for the same. In this case, ABC LLP and its partners individually as well as jointly will be held liable and Mr. Black can individually also claim damages from any of the partners.
- It allows the plaintiff to recover the dues and increases the probability of getting claims settled.
- It makes dormant or inactive partners vigilant as their assets will be held liable despite the fact the partnership firm ( in which they are a partner) is a limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies. one.
- Joint and several liabilities help the plaintiff ( the party that suffered due to breach of contract terms) to avoid the hassle of fixing responsibility as all partners and the firm can be held jointly and several liable.
Why do Joint and Several liability Exist?
Joint and Several Liability exist because it has been observed in many instances that in certain contracts it is difficult to hold any particular person liable for the non -fulfillment of agreement terms. Also, it has been observed many times one of the parties files for bankruptcy leaving the plaintiff without an adequate claim and other members get a shield. With this, the plaintiff can file suit against that member who can meet the claim, and subsequently, the member can claim the share of the other members and the plaintiff receives the adequate claim and not left in the lurch.
Example of Joint and Several Liability
Ray and Sherry married each other and took a Housing Loan from True Value Bank for $100,000. The Loan Agreement clearly states that both are jointly and severally liable for the said liability. At the time of Loan’s ailment, Ray was working full time and Sherry was studying her Masters.
After two years, due to the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors., Ray lost his job while Sherry started her venture through the huge amount she received from her grandparents as part of their family wealth distribution. Due to the non-payment of Housing loan dues by Ray, the Bank filed its claim and the court decided to recover the same from Sherry as Ray was completely bankrupt and Sherry was having meaningful resources to repay the debt.
Thus we can see how it facilitates the plaintiff (in this case Bank) to pursue recovery quickly and in the most effective way.
- One of the most important reasons which strongly goes in favor of this clause of Joint and Several Liability is the fact that it enables the Plaintiff to get justice and compensation for the loss suffered. Normally it is observed due to the Limited Liability company structure, partners shield themselves for negligence done due to the non-fulfillment of Agreement terms by them. Through it, the Plaintiff can ensure that the claims are made good by making those parties to the contract individually liable who have deep pockets and the ability to pay compensation.
- It results in speedy dispute resolution between parties as once liability is determined, it can be claimed by proportionately or outright from a partner who is competent to pay in full ( in the case where other partners are insolvent or lack of financial means).
- One of the most important reasons on which Joint and Several Liability is criticized is that it doesn’t lead to liability proportionate to the fault of the parties. In other words, in a dispute suppose there are three defendants and one of them is majorly responsible for the damages suffered by the plaintiff but doesn’t have financial means to make good the loss is suffered by Plaintiff and there is another defendant with no involvement but with good financial capacity.
- Due to Joint and Several Liability clauses, the Plaintiff can directly sue the defendant with the good financial capacity to make good all the losses suffered by the Plaintiff.
Every Contractual agreement between two parties involves discharging certain terms as part of the Agreement and no discharging of the same gives rise to Liabilities. It is a double edge sword, in a way, it helps the Plaintiff to recover the damages from any partner or all depending upon the financial capacity of the parties. Also at the same time, it makes the other party well aware that Agreements entered into should be taken seriously and non-fulfillment cannot be rescued under the aegis of Entity structure and personal accountability will be there to make good any loss incurred to the other party.
This has been a guide to Joint and Several Liability and its Meaning. Here we discuss why does it exist, the purpose of joint and several liabilities along with an example, advantages and disadvantages. You may learn more about from the following articles –